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ANTICOMPETITIVE THREATS FROM PUBLIC

UTILITIES: ARE SMALL BUSINESSES LOSING OUT?

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

WASHINGTON, DC, MAY 4, 2005

Serial No. 109–15

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Martin, Mr. Mike, President, F.K. Everest, Inc. ................................................... 5

Harvey, Mr. Brian, President-H&C, Inc. ............................................................... 9

Kelleher, Mr. Hugh, President-PHCC of Greater Boston ..................................... 10

Peters, Mr. Adam, Progress and Freedom Foundation ........................................ 12

Hargis, Ms. Lynn, Public Citizen ........................................................................... 14

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 29

Velazquez, Hon. Nydia ..................................................................................... 32

Prepared statements: 

Martin, Mr. Mike, President, F.K. Everest, Inc. ............................................ 34

Harvey, Mr. Brian, President-H&C, Inc. ........................................................ 38

Kelleher, Mr. Hugh, President-PHCC of Greater Boston ............................. 42

Peters, Mr. Adam, Progress and Freedom Foundation ................................. 53

Hargis, Ms. Lynn, Public Citizen .................................................................... 57

Attachments: 

Richardson, Mr. Alan H., President & CEO, American Public Power 

Association ..................................................................................................... 60

Martin, Mr. Mike, President, F.K. Everest, Inc. ............................................ 73

(III) 

(1)

ANTICOMPETITIVE THREATS FROM PUBLIC 

UTILITIES: ARE SMALL BUSINESSESLOSING 

OUT? 

WEDNESDAY, MAY 4, 2005

HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Committee met, pursuant to call, at 2:15 p.m. in Room 311, 

Canon House Office Building, Hon. Donald A. Manzullo [chairman 

of the Committee] presiding. 

Present: Representatives Manzullo, Bartlett, Chabot, Akin, 

Fortenberry, Westmoreland, Velazquez, Lipinski, Christensen, 

Davis, Sanchez and Moore.

Chairman MANZULLO. Good afternoon, ladies and gentlemen. Today’s hearing focuses on another part of a consistent theme raised 

from this podium. 

Our Committee and small business advocates of every stripe 

worry about the health of the marketplace and certain actions by 

government that tip the scales in favor of one party over another. 

There have been many instances where the big guys and the well 

connected are protected at the expense of the entrepreneur or 

where the new entrant or small businessman is overlooked. We 

have fought against this many times in the past. 

For instance, when our Committee learned that the Federal Government Printing Office was taking away work from the private 

sector we shut them down. We went after Federal Prison Industries for similar unfair practices. This even applies in the trade setting. 

We have raised questions about government subsidized or government controlled entities winning U.S. Defense contracts. I have 

spoken out about Chinese state owned companies competing with 

U.S. companies that have private shareholders and face real market pressures which state controlled entities can avoid. It is a simple question of fairness. 

Today the issue we confront is growing competition from service 

companies owned and controlled by investor owned utilities and 

some municipal owned utilities. The real worry we have here is not 

dissimilar to the other examples I mentioned. The utility companies in most every state have their rates fixed by public utility rate 

commissions, and they are essentially guaranteed a profit each 

year. Their costs are a public record. Their rates are fixed with a 

reasonable profit in mind. 

2

This is a legacy of the very high priority we place on electrifying 

nearly every home in America and not unlike the universal service 

fund program we have devised for telephone services. While many 

might question the wisdom of these arrangements, they are a fact 

of life for every American. 

Increasingly, the utility companies are creating subsidiaries and 

affiliate companies that provide other kinds of services apart from 

the basic power supply delivery. The diversity and scope of these 

services seems to grow each year. Companies owned and operated 

by these utilities sell plumbing and electrical services, home remodeling, vinyl siding, storm windows, subscription service contracts, 

appliance sales and rentals and many other services that range 

from home security systems to high-speed internet access. It is 

truly a growing phenomenon. 

Like me, the witnesses here today are concerned that these new 

companies enjoy unique advantages because of their special status 

as instruments of a public utility. While direct subsidy from ratepayers is proscribed, there are many ways that these new entrants 

could get an unfair advantage. 

For sure, they can obviously use the highly visible brand name 

developed over many years and paid for by the guaranteed profits. 

So too, many are able to avoid a lot of the pitfalls of finding startup capital that others might face without the benefit of a successful 

and long-established parent. These are just a few of the concerns 

we hope to learn more about today. 

If you do not see a witness from the public utility sector, they 

refused to participate in this hearing. We have other methods, including subpoenas, to get to the heart of this matter. We are very 

upset—very, very upset, extremely upset—with the special status 

that the public utilities have and the lists of customers are being 

used to disadvantage little people, those before us, those who have 

the integrity to show up and participate in the hearing. 

I now recognize the Ranking Member, the gentlelady from New 

York, for her opening remarks. 

All Members are reminded that following today’s hearing they 

will have five business days to submit statements in writing or 

other supportive material that without objection will be made a 

part of the hearing transcript. 

At the appropriate time following Mrs. Velazquez’s opening statement I am going to recognize Congressman Tierney, who has a constituent that he wants to recognize. 

Congresswoman Velazquez?[Chairman Manzullo’s statement may 

be found in the appendix.]

Ms. VELAZQUEZ. Thank you, Mr. Chairman. There is no question 

that our nation’s small businesses are facing a myriad of challenges 

today. Between skyrocketing health care, energy and gas prices to 

a growing budget deficit, there are significant barriers standing in 

the way only making it more difficult for small business owners to 

successfully run their business on a daily basis. 

Not only do they have to deal with this additional cost, but small 

business traditionally face unfair competition from larger businesses. This competition has been particularly dominant in industries related to energy. Small firms consistently find themselves 

3

living in the shadow of large public utility companies. That is why 

protections such as the Public Utility Holding Company Act, 

PUHCA, have been put into place. 

Since its inception in 1935, PUHCA has acted as a firewall protecting small businesses from having to compete with monopolies 

within the public utility industry. PUHCA was created to eliminate 

unfair practices and other abuses by electricity and natural gas 

holding companies. By limiting the geographic scope of public utilities, state utility commissions were able to effectively regulate 

them. 

However, regulation and protection is about to become significantly tougher. Two weeks ago the House passed an energy bill 

that did little, if anything, to help small firms. With today’s national average price of gasoline at a record level of $2.24 a gallon, 

42 cents higher than just a year ago, the situation is only getting 

worse. 

Not only did the energy bill fail to relieve small businesses of the 

record high gasoline prices, but it also repealed PUHCA. Without 

the protections of PUHCA it will be difficult to regulate multi-state 

public utility holding companies. Utilities will be able to take liberties in regard to cross-subsidization that are currently prohibited. 

The repeal of PUHCA gives utility companies a clear, competitive 

advantage. Not only will this wrongfully harm small businesses 

and consumers, but it will negatively impact the U.S. economy altogether. In the past, allowing public utility companies to break into 

unregulated areas has simply not worked. 

Prior to the inception of PUHCA, 53 public utilities failed, creating significant economic disruption. Since its inception, not one 

PUHCA regulated utility has failed, and it has prohibited utilities 

from entering into unregulated endeavors, protecting small businesses and this nation’s economy. 

When the House passed the energy bill, not only did it repeal 

PUHCA, but it failed to offer any new safeguards. Clearly what we 

need now is strong protection for small firms. If the Bush Administration decides that public utility companies should be able to delve 

into this area then we need to ensure that protections are in place. 

Democrats have been engaged on this issue in the past. Over the 

last two Congresses we wrote a letter to the chairman of the Energy and Commerce Committee asking them to ensure that protections are in place in these instances. 

What is most upsetting is that we are sitting here weeks later 

to address a problem that could have been prevented if we had 

broached this subject before the energy bill came up in the House. 

Now the battle is even tougher as we try to ensure that a provision 

is offered in the Senate. 

What we need now is a provision that offers protection to small 

businesses, one that will not allow the public utility companies to 

use ratepayer assets to pursue their own ventures, one that prohibits utilities from using an already branded name and using 

equipment already under their monopoly in order to provide additional services. 

Clearly small businesses do not have the resources to compete 

with these unfair advantages. Not only do this nation’s entrepreneurs deserve a level playing field, but they also deserve to be 

4

protected. Without the protections offered under PUHCA, our nation’s entrepreneurs and our economy will be teetering on the brink 

of yet another economic disruption. 

With an economy still struggling to recover, we must ensure that 

a provision is offered in the Senate so our nation’s small businesses 

can continue doing what they do best, creating jobs and stimulating 

economic growth. 

Thank you, Mr. Chairman. 

[Ranking Member Velazquez’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. 

Congressman Tierney?

Mr. TIERNEY. Thank you very much, Mr. Chairman and Ranking 

Member Velazquez. I appreciate this opportunity to introduce my 

friend, a member from my district on this. 

Hugh Kelleher is the Executive Director of the Plumbing-Heating-Cooling Contractors Association of Greater Boston. He has 

great ties to my district, which is north of Boston, and helps out 

on a lot of different Committees from the Tree Committee on up 

in the community in which he lives. 

He is also obviously the head of the Plumbing Contractors Association of Boston, but I found out from our conversations earlier 

that he is a former staff member here in Congress, having worked 

for Jim Shannon when he was a congressman here on the Ways 

and Means Committee, and he himself is a licensed master plumber and a small businessman who is now working with the Association. 

Mr. Chairman, I understand that this hearing is going to deal 

with anti-competitive threats from public utility companies, and 

Mr. Kelleher has a compelling story to tell about what is going on 

in Massachusetts. 

You mentioned in your opening remarks about the tipping of the 

scales, the big guys against the small people, the small regular people in America. I think that is what we are seeing more and more. 

Here with utilities we are dealing with monopolies that have 

friends in high places. Unfortunately, too often those friends in 

high places wage their influence here in Washington, and it is not 

always a good result for small businesses. 

There are a number of ways we can deal with that. One is legislatively, and I am glad to see that this Committee is getting out 

in front of that. I commend you for that. Another is regulatory, but 

in both of those ways too often it is like a David and Goliath battle 

for small businesses. 

There is a saving grace in our system, and that is of course the 

balance of powers and the fact that we have a judicial system that 

allows people to take recourse there if necessary. I talked to Mr. 

Kelleher earlier today and told him that I think that if we are not 

able to do things legislatively then certainly hopefully their national and state organizations might look at the Federal Trade 

Commission Act and our local FTC Acts like Massachusetts’ Chapter 93[A] and try to get to the bottom of this by using those reVerDate 0ct 09 2002 18:28 Oct 11, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\HEARINGS\21290.TXT MIKE
5

sources against these unfair business practices. It will help them 

both prove their case and get some recourse for it. 

I just want to thank you, both of you, and all the other Members 

of this Committee for the hard work that you are doing in this area 

and the fact that you regularly stand up for small businesses and 

do such a great job of it. I thank you for welcoming Mr. Kelleher 

here. I know you will give his testimony full consideration, and I 

appreciate the opportunity to come here today and introduce him.

Chairman MANZULLO. Thank you, Congressman Tierney. 

Our first witness is Mike Martin, president of F.K. Everest, 

speaking on utility unfair competition and cross-subsidization. 

Mike, you have to speak closely into the mike. Thank you. 

The clock is timed for five minutes. It is right in front of Mr. 

Kelleher. That does not mean that the timing only applies to him. 

When it gets down to the yellow that is one minute. When it gets 

to the red you are out of time, okay? 

We look forward to your testimony. The written statements of all 

the witnesses will be entered into the record without objection. 

Please proceed, Mr. Martin. You have to turn on the mike there.

Mr. MARTIN. Sorry.

Chairman MANZULLO. All right. Start all over again. We will 

reset the clock. Go ahead. 

STATEMENT OF MIKE MARTIN, PRESIDENT, F.K. EVEREST, 

INC.

Mr. MARTIN. Good afternoon, Chairman Manzullo and Members 

of the Committee. My name is Mike Martin. I am president of F.K. 

Everest Electrical Contracting, a firm headquartered in Fairmont, 

West Virginia. Our firm is a member of the National Electrical 

Contractors Association, and today I speak for myself and also on 

behalf of the entire association of 4,200 electrical contractors across 

the United States. 

I have served as president of F.K. Everest since the year 2000. 

In that position I have had direct experience with problems of competing with utilities on a playing field that is anything but balanced. Prior to coming to F.K. Everest, between 1986 and 1996 I 

held several positions with Allegheny Power System, so I can truly 

speak to this issue from personal experience. 

Here are some examples of the ways utilities can unbalance the 

competitive playing field in favor of their unregulated entities. One 

way a utility gains a competitive advantage is for its unregulated, 

non-utility entity is through the practice of incremental billing. 

When a normal business has to rent or purchase equipment or hire 

manpower it must do so at market rates. 

However, an unregulated electric utility using the same equipment and manpower provided by its utility operations is billed only 

the incremental cost for the rental of the equipment instead of the 

fair market price. This constitutes a major unfair advantage for the 

utility’s unregulated venture. 

6

The utility will argue that billing at such incremental cost is not 

cross-subsidization because they are billing for all costs incurred 

for the additional use of that equipment or for the personnel.

Chairman MANZULLO. Mr. Martin, first of all I want you to take 

a sip of water, and I want you to relax, okay? We are going to add 

some time back to your clock again. 

Are you all right? Is this your first time speaking before a congressional hearing?

Mr. MARTIN. Yes. Yes, sir.

Chairman MANZULLO. Okay. What I would like you to do is to 

go to the portion of the testimony that tells your story.

Mr. MARTIN. Sure.

Chairman MANZULLO. Then if there is time we can go back to the 

general picture. Is that okay with you?

Mr. MARTIN. That is great.

Chairman MANZULLO. All right.

Mr. MARTIN. Thank you very much, Mr. Chairman.

Chairman MANZULLO. We will tell you when to stop. Just ignore 

that timepiece, okay? Go ahead.

Mr. MARTIN. Okay. Addressing the issue of incremental cost, the 

utilities are customarily billing their non-regulated entities for incremental cost, which is just the additional cost for using that 

equipment or personnel and not the full market price of the use of 

that equipment. 

However, while there are no additional costs to the utility, the 

non-regulated company has gained an unfair advantage. It is a 

benefit derived from the use of the utility property, and I feel that 

that difference between the market price and the incremental cost 

should remain in the regulated company to the benefit of the utility 

customers. 

A specific example might be if a specialized piece of equipment 

is used by the non-regulated utility and it is used let us say 10 percent of the time. The utility may have purchased that again for 

themselves for 10 percent of the time, and they have to have it 

available to them 24 hours a day, seven days a week, in case of 

an emergency, but if the non-regulated side needed that piece of 

equipment and it is rented to them at the incremental cost, just the 

cost for demand power or to operate the equipment or the fuel or 

maintenance, there is an unfair advantage because while they are 

not directly subsidizing the non-regulated utility and the equipment is better utilized, the subsidiary has been given an unfair advantage by the below market rates. 

If a contractor needs the same piece of equipment he has a couple options. One, he can purchase the equipment, and if he is only 

7

using it 10 percent of the time he has to spread the full cost of that 

equipment over that 10 percent of the time he is using it, or he 

could go out and rent the equipment, and again he has to pay the 

full market price for that equipment. If the subsidiary chooses to 

use that equipment again for its competitive ventures it should be 

charged the full market price for that equipment. 

Another item would be a non-regulated entity affiliated with the 

public utility benefits directly and substantially if it uses the name 

and logo of the public utility. It also benefits even for its inherent 

relationships whether it uses the actual name or logo. As soon as 

a sales representative tells a potential customer their relationship 

with a public utility they immediately gain from the name recognition and the goodwill of that public utility. 

An independent contracting firm has to use its own money to advertise and to build its own business relationships. In our area, if 

you look in the yellow pages of the local telephone book you will 

see many advertisements for electrical contractors. However, you 

will not see any advertisements from a utility non-regulated business. 

As a contractor, I would love to have mailings on a monthly 

basis, a postcard or a utility bill, mailed to all my current customers and potential customers on a monthly basis so when my 

salesperson makes a call to that customer they would immediately 

know who I am. Again, this is just another example of how the utilities gain, how their non-regulated entities gain from the utility 

business. 

Another example would be upgrades involving customer owned 

and utility owned facilities. There was a local hospital who was upgrading their electrical facilities for future renovations, and it included their switchyard and some utility facilities within their 

switchyard. This particular service point was a critical point for the 

hospital. It could not be taken out of service, nor could it afford any 

interruptions. 

The customer’s representative who heard about this before the 

general public and was dealing with the customer had stressed to 

the customer that there had to be very strict, close cooperation between the contractor and the utility to achieve this work. He also 

went on to say the only way to assure that cooperation was for the 

utility to do work on both the customer owned and the utilities. In 

fact, he was in our office and mentioned that he was—

Chairman MANZULLO. Mike, go on to the college.

Mr. MARTIN. Sure. Okay. The local college—

Chairman MANZULLO. Is this not fun? Go ahead. Go ahead, 

please.

Mr. MARTIN. Yes. In this instance, the local college had a 10-year 

construction plan where they were going to be building some new 

buildings and remodeling and renovating some existing buildings. 

In this case it was a state owned college, and they received their 

service at a high voltage through a single metering point. From 

8

that point to the individual buildings it went through the college 

owned facilities; not utility owned, but the college owned facilities. 

Again the utility, through the utility practice, heard about the 

project before the general public did, had their foot in the door, 

talked with them and convinced the colleagues to single source the 

construction or upgrade these facilities directly to the public utility 

but through their non-regulated entity. 

When we became aware of it and mentioned it to the National 

Electrical Contractors Association they challenged the project as a 

giveaway and the fact that in the State of West Virginia state 

agencies are to solicit bids for any projects over $25,000, and in 

this case they had not. 

After challenging that issue all of a sudden the project became 

a utility owned facilities. The college turned the facilities over to 

the utility, and the utility upgraded them and put individual metering points at each service location. Therefore, it took the work 

away from the non-regulated side, and it became a utility property.

Chairman MANZULLO. Okay. I am going to halt you right there.

Mr. MARTIN. Sure. 

[Mr. Martin’s statement may be found in the appendix.]

Chairman MANZULLO. Are you doing all right?

Mr. MARTIN. I am doing okay. I apologize.

Chairman MANZULLO. You do not need to apologize. Have another sip of water, and then we will be back with a round of questions, okay?

Mr. MARTIN. Sure.

Chairman MANZULLO. Our next witness is Brian Harvey. Brian 

is from Laurel, Maryland. I think we met what, a couple months 

ago?

Mr. HARVEY. You met our president, Richard Dean.

Chairman MANZULLO. Okay.

Mr. HARVEY. Yes.

Chairman MANZULLO. In any case, from your company. That was 

one of the interesting stories that further peaked my interest in the 

subject. 

Brian, we look forward to your testimony.

Mr. HARVEY. Thank you. Thank you, Mr. Chairman.

Chairman MANZULLO. If you see the clock there, we will follow 

regular order on the clock. I gave an exception to Mr. Martin because he needed some time to drink his water. 

Go ahead. 

9

STATEMENT OF BRIAN HARVEY, PRESIDENT, H&C INC.

Mr. HARVEY. Thank you, Mr. Chairman and Ranking Member 

Velazquez and all the other Members of the House Committee on 

Small Business. 

I am here representing the Air Conditioning Contractors of 

America. We represent 5,000 local, state and national members. 

Most of our contractors are family owned and operated small businesses, and many of these businesses are in their second and third 

generation of family ownership. 

My company in Laurel, Maryland, we have 25 employees. I am 

a second generation owner. My father started the business in 1969. 

We provide residential and commercial heating and air conditioning service throughout the State of Maryland. I am also a board 

member of the Maryland Alliance for Fair Competition and the 

past president of the National Capital Chapter of ACCA. 

I first experienced unfair competition with a local utility company in July of 1994 when Baltimore Gas & Electric, BG&E, purchased one of my largest competitors. BG&E’s acquisition of Maryland Environmental Systems created a 800 pound gorilla in the 

central Maryland heating and air conditioning contracting community. 

Before purchasing Maryland Environmental Systems, our company had always had a good working relationship with BG&E and 

participated in many, if not all, of their contractor programs. Maryland Environmental Systems was a large, well-established, well-organized heating and air conditioning company. BG&E gave them 

an infusion of cash and allowed them to share in over one million 

residential and commercial electric customers and 600,000 gas customers. 

Maryland Environmental Systems, which was renamed BG&E 

Home, gave BG&E immediate entry into the air conditioning contracting field. They provided the platform of established operating 

systems, trained personnel and contracting knowledge. 

Almost immediately we saw former Maryland Environmental 

Systems employees driving around in BG&E trucks, trucks that 

were paid for with ratepayers’ money. These trucks that were originally purchased by Baltimore Gas & Electric to provide Maryland 

ratepayers with gas and electric service were now being used by 

BG&E Home to install heating and air conditioning systems in direct competition to me. 

The two companies began to share resources and consolidate 

overhead expenses. Needless to say, with plenty of cash and plenty 

of customers the company flourished. As an independent businessman, I find myself continually working harder to try and maintain 

market share. I do not get free trucks from the electric company. 

I have to pay for my trucks like every other business does. 

When marketing to new customers I have to explain to them who 

my company is and why they should choose us to install their new 

furnace or air conditioner. BG&E Home never has to explain who 

they are because everyone gets an electric bill every month with 

the BG&E logo on it. No doubt, many of you have these in your 

own homes. You get the utility bill with the stuffer in there trying 

to sell you storm windows and plumbing repairs and what else. 

10

The point is that the name has immediate and enormous name recognition. The utility’s name is just a slam dunk with the consumer. 

To give you an idea of how important that name is, a somewhat 

different scenario recently played out in the Washington metropolitan area. Washington Gas, which is a public utility like BG&E, decided to enter the air conditioning business. They did this by putting up $25 million along with a private venture capital fund who 

also put up $25 million to begin operations, so with a pool of $50 

million they started purchasing privately owned air conditioning 

firms and consolidating them under one name. 

They named the new company Primary Multicraft, a $50 million 

company with acquired HVAC contracting expertise, but with no 

identifiable history and no name recognition. They had almost the 

same business model as BG&E Home, yet they did not use the utility’s trademark name. Two years later they filed Chapter 7, and 

they were out of business. 

This shows the importance of the brand and what that means to 

the companies. Recently both Home Depot and Sears have enthusiastically entered the home air conditioning market. I do not like 

competing against two of the largest retailers in the country, but 

it is a fair fight. They have paid for their name recognition with 

their own resources and not with the ratepayers’ money. 

I do not want preferential treatment or more regulatory burdens, 

but I do want a fair playing field. Let the consumer decide for 

themselves. I am happy to compete with anybody, but a utility has 

a unique advantage over an independent business person, and it is 

really not fair. 

Thank you for your time and attention. 

[Mr. Harvey’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. 

Our next witness is Mr. Kelleher, who has already been introduced. Mr. Kelleher, we look forward to your testimony. 

If the remainder of the witnesses would try to concentrate on the 

anecdotal stories that brought them here? We know the big picture. 

We want to know how it impacts you directly. 

Mr. Kelleher? 

STATEMENT OF HUGH KELLEHER, PLUMBING-HEATINGCOOLING CONTRACTORS OF GREATER BOSTON

Mr. KELLEHER. Thank you, Congressman Manzullo, Ranking 

Member Velazquez, other Members of the Committee. Let me get 

right to the point, although I do just want to mention it is a great 

pleasure as a former congressional aid to be here in a meeting and 

actually be offered a seat. 

The situation in my home state really began to take on added dimension when KeySpan moved up from New York. Each year they 

have been authorized by our state’s energy regulatory agency to include in its rate structure a promotional budget line item. 

That promotional budget line item costs the natural gas customers millions of dollars each year in Massachusetts, but if you 

peel back that line item to see what those millions of dollars are 

11

spent on you find that much of it is being used to promote 

KeySpan’s unregulated affiliated businesses. 

What are those businesses? They include a large heating and air 

conditioning which competes directly against mom and pop contractors like the ones I represent. 

Just to follow up on an earlier example, I can tell you that in 

Massachusetts we saw one utility company bid directly against an 

electrical contractor on a job. The utility company bid remarkably 

low. People wondered how they could even cover the cost of the materials. Naturally they won the job. 

A few weeks later if you went out to that jobsite do you know 

what you saw? You saw the trucks. You saw the backhoes. You saw 

the workmen of that utility company. Now, I am sure that my 

friends who are electrical contractors would be very pleased if they 

could have the ratepayers covering the cost of salaries for their employees and making payments on their trucks. 

How aggressive are the utility companies in terms of syphoning 

off assets to open up and support other unregulated business? I 

think the most extreme example that I have seen occurred when 

KeySpan came into our state and opened up a web based business 

called MyHomeKey.com. 

One day I went to their website and discovered to my amazement 

that not only would this gas company affiliate send someone over 

to install a gas stove in direct competition to my business or a sink. 

Their website told me in fact that they would even be willing to 

come over and clean my drapes or have someone come by and cut 

my lawn. So much for the efficient delivery of natural gas. 

Now, we do not know how much money was wasted while the 

utility company tried to get into the landscaping and drapery 

cleaning businesses, but each dollar spent on that ill-conceived 

business plan was absolutely a dollar which could have been spent 

either upgrading their unreliable gas delivery system or reducing 

the cost of natural gas. 

One of the common models actually is the free equipment giveaway. A utility like KeySpan makes every effort to convert customers from other energy sources by giving away free equipment. 

Free equipment offers raise a couple of basic points. First of all, the 

consumer is paying through their gas or electric bill the cost of that 

free equipment. If the utility company stuck to its primary business, which is supposed to be the reliable, cost-efficient delivery of 

natural gas or electricity, prices could actually be lowered and their 

delivery systems could be improved. 

The second problem is that these promotional giveaways have a 

highly negative effect on small business people. It is very difficult 

for a plumbing company to bid a job against a utility’s affiliate 

when, as in the case of KeySpan, that affiliate has a whole warehouse full of boilers and furnaces which have been paid for by the 

ratepayers. 

Before I conclude I just want you to imagine one scenario. You 

and I each run a business in the same town. We are competitors, 

but part of my business has access to hundreds of thousands of dollars of government approved subsidies. That part of my business 

has a special status which in fact grants me a profit, and I use that 

12

profit and shift funds and resources over to the part of my business 

which competes directly against your business. 

I can guarantee that over time no matter how well you run your 

business, no matter how well your employees are trained, no matter that you offer a truly market rate price, I will put you out of 

business. Now, this does not sound to me like the kind of economic 

model that made the American economy the greatest in the world. 

What we are asking for in quick summary is that in conference 

with the Senate that your Committee work with representatives 

from Energy and Commerce, take a closer look at this issue. We 

are not asking for more regulation. All we are asking is that Congress actually create a firewall between the utility’s regulated businesses and its unregulated affiliates. 

Thank you very much. 

[Mr. Kelleher’s statement may be found in the appendix.]

Chairman MANZULLO. Before you end, you are speaking on behalf of yourself and on behalf of the?

Mr. KELLEHER. Plumbing-Heating-Cooling Contractors Association National. We represent thousands of plumbing and heating/

cooling contractors from every state in the United States.

Chairman MANZULLO. Thank you, Mr. Kelleher.

Mr. KELLEHER. Thank you.

Chairman MANZULLO. Our next witness is Adam Peters, Research Fellow and Regulatory Counsel at the Progress & Freedom 

Foundation. 

Mr. Peters, we look forward to your testimony. 

STATEMENT OF ADAM PETERS, THE PROGRESS & FREEDOM 

FOUNDATION

Mr. PETERS. Thank you, Chairman and Members of the Committee. Thank you for the opportunity to speak to you today. My 

name is Adam Peters, and I am a Research Fellow and Regulatory 

Counsel for the Progress & Freedom Foundation, a think tank that 

studies the digital revolution and its implications for public policy. 

Your hearing today is a timely one as public utilities increasingly 

are entering into new markets, including communications, which is 

my area of research. I have a lot of sympathy for regulators who 

must address the questions raised by utility entry into new markets. From a consumer welfare perspective, it may be efficient for 

a firm to expand into complementary markets. This may serve to 

increase competition in these markets, driving down prices and fostering innovation. 

However, the incentive may also exist for a utility to cross-subsidize the activities of an affiliate through its rate base. Left undetected, this strategy may cripple competition in the unregulated 

market while additional costs are extracted from the rate base 

through higher monthly bills. 

13

In addressing cost subsidization concerns, one tool regulators use 

to balance efficiency benefits with fair competition is the cost allocation method. Cost allocation is vital because it sets the competitive equilibrium in the market. To be sure, cost allocation issues 

can quickly devolve into an exercise in blackboard economics where 

competitors seek protection from competition and where one right 

answer is unattainable so the process essentially asks regulators to 

make a predictive judgment, but I do think it is the best one they 

have. 

The balance between efficiency and fair competition is therefore 

more tenuous when the cost allocation is removed from the equation. For instance, literally dozens of municipalities are entering 

into the communication space, and these efforts are usually backed 

by municipally owned electric utilities. 

In recent months this has become a highly contentious issue in 

a number of states. Municipal entrants in the communications 

markets may enjoy several artificial advantages over entrants from 

the private sector. They may be exempt from taxation. They can 

raise capital through the issuance of guaranteed tax exempt bonds. 

They may enjoy free access to utility poles and rights-of-way. 

Finally, municipally owned utilities in many states are exempt 

from oversight by state commissions and are therefore immune 

from the cost allocation requirements that might otherwise apply 

to their privately owned counterparts. Under these circumstances, 

the right of cross-subsidization and market distortion is magnified. 

For example, a recent study authored by my colleague, Tom 

Leonard, focused on three municipal entrants in Bristol, Virginia, 

Kutztown, Pennsylvania, and Ashland, Oregon. Dr. Leonard concluded that the three municipalities which offer broadband services 

in competition with private companies were unable to cover their 

costs without being subsidized. He estimated that the subsidies in 

these localities range from $350 per customer to over $1,000 per 

customer. 

Now, admittedly it is quite possible and perhaps even likely that 

head-to-head competition between these entrants and a private 

competitor will apply downward pressure on prices in the short 

run, but the ability of the municipal entrant to tap into an endless 

stream of subsidies from their rate base may include both short 

run and long run costs. 

The short run costs may include higher electric rates for taxes. 

The long run costs include the possibility of picking their own technology, creating entry barriers to new competition and predatory 

pricing, which would drive capital from the market. 

Now, despite the foregoing care should be taken in my view before legislating new federal rules without a clear showing that 

there is a jurisdictional vacuum. Where investor owned public utilities are concerned, in my view state commissions are pretty well 

equipped to handle cross-subsidization concerns. 

To be sure, the challenge of monitoring and regulating investor 

owned utilities is real, but most states to my knowledge have 

brought authority to protect consumers from unreasonable rates, 

including auditing authority and the power to investigate affiliate 

relationships. 

14

Some states have in recent years adopted codes of conduct which 

govern regulated and non-regulated entities, and while municipal 

entry into communications raises another set of difficult policy 

questions I would likewise defer to the judgment of state and local 

officials and citizens in evaluating the need for these services in 

light of local conditions. 

I want to thank the Committee once again for this opportunity 

and ask that my written remarks be made part of the record. I am 

happy to answer any questions later. 

[Mr. Peters’ statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much. 

Our next witness is Lynn Hargis, who is an energy attorney with 

Public Citizen. We look forward to your testimony. 

STATEMENT OF LYNN HARGIS, ON BEHALF OF PUBLIC 

CITIZEN

Ms. HARGIS. Thank you, Mr. Chairman, Ms. Ranking Member, 

Members of the Committee. Thank you very much most of all for 

having this hearing. 

If the Public Utility Holding Company Act is actually repealed 

after 70 years we are going to have a Tsunami of problems with 

utility non-regulated affiliates not only for small businesses, 

though they will be very affected, but for all the rest of the country 

as well. 

I would like to just point out one mistake in my testimony. In 

the last paragraph on the first page I said under PUHCA utilities 

could not go into non-utility business and companies had to give up 

their non-utility businesses. 

I am afraid I bought sort of the other side, which is that PUHCA 

is already gone. It is not already gone, so that should say that 

under PUHCA utilities cannot go into non-utility businesses and 

companies have to give up their non-utility businesses. 

Right now it comes as a surprise to a lot of people that oil companies cannot for example own public utilities. The minute PUHCA 

is gone they will be able to do that. We may not be able to reduce 

the oil prices immediately with a stroke of the pen, but with a 

stroke of the pen repealing PUHCA we absolutely can come up 

with an electricity/natural gas/oil cartel. 

This is a matter of great, great importance and I really commend 

this Committee for taking a look at it. Just to quickly illustrate 

that PUHCA is still very much alive, this is from an international 

law firm whose clients deal power plants. It is called The Project 

Finance News Wire. It happens to be the distinguished law firm at 

which I worked for 17 years, but they do not in any way endorse 

what I am saying here today. 

It has just a heading in this article, and it says, ‘‘The 1935 law 

called PUHCA requires overseas buyers acquiring U.S. utilities to 

shed their non-utility businesses.’’ I do not know. I find that a lot 

of people do not realize right now that foreign companies cannot 

under PUHCA come in and acquire public utilities unless they happen to be public utility holding companies themselves, and that is 

only very recently. 

15

It does not seem to bother anyone else, but I think it may bother 

small businesses that they are not only going to have to compete 

with huge American public utility holding companies, but also EON 

is a German pharmaceutical company who wants to buy American 

utilities. There are companies all over the world that want to do 

that, and the minute that PUHCA is gone they will be able to do 

that. 

The other thing I wanted to show you happened after I wrote my 

testimony yesterday morning I am afraid, so this is very, very recent breaking news. We won a case at the Securities and Exchange 

Commission, and an Administrative Law Judge ruled that the 

American Electric Power/Central & Southwest Public Utility Holding Company merger should be denied under PUHCA because the 

main issue in that case was are Michigan and Texas in the same 

region of the United States. 

Now, I have personal opinions as somebody who grew up in 

Texas on that, and I think probably most of you do as well. The 

judge found that they did not. The Court of Appeals had indicated 

this when they remanded the case along with a map showing AEP 

up here and Central & Southwest down here. 

This still goes to the full Commission, but the point I am trying 

to make is there is nothing in the federal law, in any of the laws 

of the United States, that would stop this merger other than 

PUHCA. The FERC said oh, it looks great to us. They I think required them to get rid of 500 megawatts. That is like one merchant 

power plant. AEP has 30,000 megawatts. 

The Department of Justice said this looks okay under the antitrust laws. The Federal Trade Commission said this looks okay to 

us under the antitrust laws, but they have repeatedly told the Congress in testimony that they do not have the kind of structural jurisdiction over utilities that PUHCA does. 

So you are talking about an 800 pound gorilla. This is going to 

be an 800 million pound gorilla because they made it very clear 

that if PUHCA is gone not only can AEP acquire Central & Southwest; they can acquire the Southern Company, Entergy, Xcel, 

Excelon. In fact, we can have one big, happy public utility holding 

company that owns all the utilities in the United States. Prior to 

the enactment of PUHCA that is pretty much where they were 

headed. 

Some of you may have seen on 60 Minutes the show Who Killed 

Montana Power Company. This is a 90-year-old electric utility in 

Montana, and as soon as utilities were allowed to purchase telecommunications businesses they jumped into that. They bought 

telecommunications businesses, and then they thought oh, let us 

get rid of this utility stuff—it is kind of boring—and so they did. 

Unfortunately, the telecommunications business did not quite 

work out. They went bankrupt. In the meantime, Northwestern, 

which is a South Dakota utility who had bought some of those 

transmission and other utility facilities, had also gotten into telecommunications. They went bankrupt. In the meantime, Montana 

citizens found out they were having to pay really high prices to get 

power from their own former power plants that had been sold off 

to an unregulated business. 

16

You know, whether you look at what happened before PUHCA in 

the 1920s or you look at what happens like with someone like 

Enron who got all sorts of exemptions from PUHCA today or 

whether you look at Montana Power—

Chairman MANZULLO. One thing I am not exempt from is the 

time.

Ms. HARGIS. I am sorry. I forgot to look.

Chairman MANZULLO. That is okay.

Ms. HARGIS. Thank you very much. 

[Ms. Hargis’ statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much. Thank you for the 

excellent and very diverse testimony. 

Let me try to weave something here, and perhaps you can help 

me. I think whoever wants to try to answer the question please feel 

free to go ahead with it. 

Ms. Hargis, let me ask you this question. Are there any public 

utility companies that are not-for-profit in the country, municipally 

owned?

Ms. HARGIS. Well, municipally owned ones I assume.

Chairman MANZULLO. Okay. Do we see any indications that 

some municipally owned utilities are getting into the heating and 

air conditioning business? Does anybody have any knowledge of 

that?

Mr. KELLEHER. I cannot say I know.

Chairman MANZULLO. Because that would be one scenario with 

a group that is not-for-profit.

Ms. HARGIS. Right, but they are typically—I mean, they are creatures of the states, so the states could regulate that.

Chairman MANZULLO. Okay.

Ms. HARGIS. I think the big problem is when you get into interstate holding companies, owners of utilities where one single state 

cannot control what would be happening to the utilities. 

That is why we had PUHCA because President Roosevelt had 

originally been governor of New York, and he found that no matter 

what he did he could not control New York electric rates because 

of the interstate holding companies.

Chairman MANZULLO. Okay. Let me go on to my second question 

then with regard to the public utility companies. How many of 

them or how many states actually regulate the rates, or are some 

states unregulated with regard to the rates?

17

Ms. HARGIS. All states regulate distribution rates. Some have deregulation in terms of power supply, which is wholesale rates are 

regulated or rather right now deregulated by the Federal Energy 

Regulatory Commission, and under the supremacy clause of the 

Constitution those costs have to be passed through so the states 

have very little choice. They have to pass through what the wholesale rates are.

Chairman MANZULLO. So the rate regulation, would it be fair to 

say, results in a built in profit margin for the utility?

Ms. HARGIS. They certainly have the ability to make a profit, you 

know, if they screw up their business. Usually rates are set at a 

certain level.

Chairman MANZULLO. Right.

Ms. HARGIS. If they indeed, you know, manage to make a profit 

at that level then to that extent it is built in, yes.

Chairman MANZULLO. But the purpose of setting the rate by the 

government, the state government, is to ensure that there is at 

least a reasonable rate of return so that the company stays in business.

Ms. HARGIS. Yes, sir.

Chairman MANZULLO. Therefore, the rate guarantees a profit.

Ms. HARGIS. As I say, if you operate efficiently enough to make 

a profit at that rate.

Chairman MANZULLO. Okay. Okay. Mr. Kelleher?

Mr. KELLEHER. I know that some of the research that I have 

done, the standard return on capital investment is about 10 percent. That is a guaranteed amount that the utility companies in 

our region are often able to maintain. They do have to invest some 

of their money obviously in improving their infrastructure. 

Again, I am familiar with what happens in New England, but, 

as I said, I am here representing contractors all around the country.

Chairman MANZULLO. Okay. Now I can do the followup. So the 

objection is the fact that companies who are given a government 

guaranteed profit then can leverage those assets, which would be 

customer lists, name brand and just pure muscle based upon the 

size to the detriment of the little guys?

Mr. KELLEHER. Equipment, manpower.

Chairman MANZULLO. Okay. Is there anything illegal in that, 

Ms. Hargis? I think you are the only attorney on the panel, correct?

18

Ms. HARGIS. No. I do not think they are supposed to use business 

for—you know, you should certainly not use utility assets for nonregulated business. 

It is illegal under the Holding Company Act for a holding company to do that, and that is why if you are a multi-state holding 

company they are very, very strictly regulated by the Securities 

and Exchange Commission, all of their financial interactions with 

the public utilities, for that very reason.

Chairman MANZULLO. What about, Mr. Harvey, it was in Baltimore. What is the name of the company?

Mr. HARVEY. Baltimore Gas & Electric.

Chairman MANZULLO. Okay. Do you know anything about that 

company, Ms. Hargis?

Ms. HARGIS. They have changed. They were a holding company, 

and in Constellation I think they spun that off. Now they may have 

merged with Pepco. I am sorry. They have been moving around 

pretty fast. 

In terms of the parent company, if indeed it is in two states and 

no single state can regulate that utility then that is when PUHCA 

kicks in and the Securities and Exchange Commission does it.

Chairman MANZULLO. Mrs. Velazquez?

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Ms. Hargis, are small businesses throughout the economy likely 

to see a reduction in their electricity bills or rates as a result of 

the PUHCA repeal?

Ms. HARGIS. Absolutely not because what we are going to see is 

massive consolidation on the part of the utility holding companies, 

and that usually leads to higher rates. 

Certainly there was a tremendous problem with higher rates 

back when PUHCA was originally passed, and also with the credit 

ratings both Standard & Poor’s and Fitch’s have said that PUHCA 

regulated utilities have much better credit ratings, and that decreases their cost of capital.

Ms. VELAZQUEZ. Will the energy bill and specifically the repeal 

of PUHCA do anything to improve electricity service and reliability? How will it reduce the likelihood of another blackout?

Ms. HARGIS. Well, I do not think it will at all because the reason 

that we are having so much problem right now is that the transmission system is being used for something that it was not designed for, which is to carry—everybody wants to go to the highest 

priced markets, and the system was not really designed for that, 

so that is what I think is causing the problem.

Ms. VELAZQUEZ. Mr. Kelleher, do you want to comment on that?

19

Mr. KELLEHER. One point I would like to make—

Ms. VELAZQUEZ. Sure.

Mr. KELLEHER. —is that we were discussing the role of the state 

regulatory agencies when they are supposed to be addressing these 

problems. 

I cannot specifically guess as to what the impact might be in 

terms of blackouts or that kind of thing, but I do know that the 

state regulatory agencies in my area have absolutely failed to do 

adequate analysis of the rates in terms of the volume, the percentage of the rates that is actually being diverted to these unregulated 

businesses. That is bound to have an impact on the efficiency of the 

utility company.

Ms. VELAZQUEZ. Thank you. Ms. Hargis, what has happened to 

consumers in Kansas following Westar’s attempt to become a home 

security company, and can you also discuss allegations that Westar 

attempted to illegally influence Members of Congress?

Ms. HARGIS. Well, what happened originally certainly was the 

same sort of situation, and I think Westar sort of used Montana 

Power as a model. The executives there were getting ready to sell 

off the utility assets and go instead into the home security business 

that they thought was going to be more profitable, but in fact was 

not. Again, I think there was a bankruptcy situation, or at least 

they had to sell it off. 

What happened was they thought PUHCA would be repealed, 

but that was not enough. They also wanted to get out of the Investment Company Act, which would have kicked in for them when 

PUHCA was gone, and so the allegations were that they contributed a lot of money to get an exemption from the Investment Company Act.

Chairman MANZULLO. Mr. Kelleher, assuming that PUHCA is repealed are there any safeguards that could be implemented that 

would limit a public utility’s ability to cross-subsidize?

Mr. KELLEHER. The group that I am here representing nationally, the plumbing and heating contractors, what we would be looking for would be some kind of compromise legislation were PUHCA 

repealed that would draw a line in the sand which would prevent 

in clear legislative language the cross-subsidization of the unregulated businesses. 

The fact is this is needed nationally because I think if you go 

around to your various states I think the Members of this Committee, if you ask the small business people in your states are you 

having a problem like this the first answer is probably going to be 

yes. 

The second problem is trying to deal with it on a state-by-state 

basis is virtually impossible. At local levels the utility companies 

maintain a massive amount of influence. It has been very difficult 

for small contractors, small business people to overcome that level 

of influence.

20

Ms. VELAZQUEZ. What about ring fencing? Would that protect 

small businesses?

Mr. KELLEHER. Yes. The term that has been used in the Energy 

Committee of ring fencing would in fact be an effective way to address this problem. 

Essentially what that does, it prevents the regulated utility company from diverting its assets either directly over to an affiliate or, 

and this is another important point, to not allow that regulated 

utility company to pass its assets up to a holding company which 

then would be allowed to pass it back down to one of the unregulated affiliates. 

The idea of ring fencing, which has been used in the Energy and 

Commerce Committee, would be one effective way to maintain the 

kind of separation that would prevent damage to small businesses.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

Chairman MANZULLO. Mr. Westmoreland?

Mr. WESTMORELAND. Thank you very much. 

You know, when you talk about this I represented part of the 

great State of Georgia for a while, and I am in the construction 

business and so I understand and feel your pain and am familiar 

with what Atlanta Gas Light has done with their company and 

what Georgia Power and Southern Company has tried to do with 

several of the unregulated companies that they have had. They 

have all failed, to be honest with you. 

In Georgia though we had a problem with our natural gas. We 

deregulated gas and had a problem with the marketing of that. We 

established some firewalls or some partitions there to keep some of 

these utility companies that wanted to offer gas service from using 

their regulated side to do the marketing on the gas side. 

Does Maryland or any of the states that you all represent have 

any such firewalls as that to keep your public utilities from getting 

into the unregulated business? Evidently they do not, but have you 

approached the legislature about doing that?

Mr. HARVEY. I have testified in Annapolis for the last three 

years. It is better now than it used to be. It used to be if your 

power went out and you called the power company you would go 

to a phone tree, and they would say if you need a new air conditioner press nine. No kidding. It would get you over to the unregulated air conditioning company. 

We are beyond that, but last time I was testifying in Annapolis 

BG&E Home had Constellation Energy’s attorney there. How much 

did they pay for that? I do not know.

Mr. WESTMORELAND. One last question, Mr. Chairman. 

Do you think that on the federal level there is something, a simple fix, that we could do that would not be as complicated as the 

PUHCA Act? I mean, is there something that you see that you all 

have in mind collectively that you could come up with that would 

be a simple fix to this?

21

Mr. KELLEHER. The answer, although many people here do have 

an appreciation for what PUHCA has done in the past, there are 

things that could be done. In this particular issue, put aside the 

other important issues that PUHCA deals with, but in terms of actually isolating this particular problem there would be language 

which could be crafted which would prevent this kind of improper 

cross-subsidization. 

One final point. At the various levels of state operations there 

are codes of conduct which, for instance, in my state happen to 

have some language in there which would suggest the utility companies are not supposed to be involved in cross-subsidization. 

The reality is though that these state regulatory agencies have 

often been dominated by former employees of utility companies and 

have been extremely sympathetic to the barrage of documentation 

that they have provided. 

When we have challenged codes of conduct, when we have 

charged violations of codes of conduct, we have not been very successful, which is why finding some language that everyone could 

agree on which would really put a ring or a firewall around this 

would really be the answer. Again, yes, this could be done, and I 

think it could be done fairly effectively.

Mr. WESTMORELAND. I would appreciate if you could get us that 

information. I think we would all appreciate if you could get us 

that information.

Mr. KELLEHER. We will do that. We will do that, Mr. Westmoreland. Thank you.

Chairman MANZULLO. Congressman Lipinski?

Mr. LIPINSKI. Thank you, Mr. Chairman. This is a very important issue obviously for all of you here and also important for me 

and I think all of us up here. I apologize for having to leave there 

for a little bit, but this is something we definitely—another area 

that we need to help the small businesses in. 

Now, I never have quite as good of questions as Mr. Westmoreland because of his experience, but I want to sort of follow up on 

something, on what he was just asking Mr. Kelleher. 

Do any of you question the possibility that cross-subsidization 

can actually be prevented? Do any of you? I know Mr. Kelleher had 

said he believes it can. Do any of you question that? Has this definitely happened at the state level? Have you seen problems in any 

states who have tried to stop it, but there are ways to get around 

the legal barriers that were set up? 

Mr. Harvey?

Mr. HARVEY. If you were able to eliminate all the shared expenses of back office and overhead and all those things and totally 

separated the regulated side from the unregulated side they would 

still have the trademark. They would still have the name recognition, which it is just huge. 

22

You know, I do not know if you can take that away. Certainly 

in Maryland we are trying to. We are actually trying to impose a 

royalty that they would have to pay to use that trademark.

Mr. LIPINSKI. Mr. Peters?

Mr. PETERS. I would just add, and maybe this is more a followup 

also to the previous question, that there really is no simple solution 

to this problem when you look at what a regulator needs to go 

through as I discussed in my testimony about the cost allocation 

method. 

In certain circumstances it may be good for these utilities to 

move into complementary markets, but you have to balance those 

concerns against questions of fairness so in a market where you 

have a lot of competition already you can probably more adequately 

set a price based on the fair market value, but utilities entering 

into a market where there is not already a lot of competition you 

will probably want some of these efficiencies to be passed along to 

customers for lower prices. 

On the communications sector, there is a new technology called 

broadband over power line. It is being deployed in Cincinnati. It is 

being tested in a lot of markets. I have no idea whether or not it 

is ever going to work out on a widespread basis, but as far from 

a consumer welfare perspective you want that sort of technology to 

go out in the market, but you also want to have these rules. 

A lot of states do have cross-subsidization rules and conduct 

rules. I think a majority of the states actually have a lot of those 

rules in place. NARUC, the National Association of Regulatory 

Commissioners, I think in 1999-2000 studied the issue extensively, 

came up with codes of conduct. A lot of the states are implementing 

those codes, and it has taken time because in the last few years 

this is a new phenomenon. 

I do have a lot of sympathy particularly in these behavioral questions and the use of a company’s trademark and its logo. These are 

difficult issues, but I think that state regulators do have the resources. They are closer to the consumer and so I am not sure what 

a federal solution would actually bring to the table other than 

maybe a redundant set of regulations and some confusion.

Mr. KELLEHER. If I could just add, to disagree a bit, I think the 

codes of conduct so far have been proven to be extremely ineffective. 

What we would be asking for, Mr. Lipinski, you asked can this 

be achieved. I think part of the answer would be to say that the 

unregulated businesses would have to be separately capitalized. 

They would have to have a different name. They would have to 

have different buildings. They would have to have different trucks. 

They would have to have different personnel, and they would have 

to have different logos. 

By putting together that kind of system we can really make sure 

that the current ratepayers—remember, the ratepayers are actually bearing this cost, and it is an unnecessary additional fraction 

of their utility bill that is being used to compete against small businesses and put small businesses out of business.

23

Mr. LIPINSKI. Well, I have certainly heard from a number of 

small business owners in my district, and I look forward to working 

with you to figure out what we can do and get something done to 

stop this really unfair practice that is hurting our small business 

owners. 

Thank you, Mr. Chairman.

Chairman MANZULLO. Thank you. 

Mr. Fortenberry, we have been notified that we have a bunch of 

votes coming up in about 10 minutes, so if you could take that into 

consideration in asking your questions in fairness to everybody 

else? Thank you.

Mr. FORTENBERRY. Thank you, Mr. Chairman. That is a very polite way of saying hurry up, Jeff. I will heed your advice. 

Actually, thank you all for your insightful testimony. This is a 

very important issue that I, being a member of city council in a 

small city and having bumped up into in a previous life a number 

of questions in this regard across the spectrum, but I did want to 

follow up with Mr. Peters. You preempted some of my questions. 

Nonetheless, there is a big issue out there in the development of 

communications as to how utilities who have already taken on the 

process obviously of providing a quasi public good can use those efficiencies, to use your language, without unfairly stifling private 

competition, but actually promoting or helping to potentially partner with it so that consumer benefit can come about—greater consumer benefit can come about—through the use of these again 

quasi public goods. 

Are there other examples out there particularly in the energy industry in which broadband has been piggybacked like that successfully without bumping up into the type of legitimate questions that 

you all have raised because of unfair subsidies of a public good? In 

other words, has the private market been allowed to partner, lease, 

in some way find new markets because of this public investment?

Mr. PETERS. I am not sure about other BPL. I am aware of I 

think Minnesota is looking at that as a WI-FI model for city-wide 

access. I think the city would help to deploy the network but then 

would bid it out to a private entity, so I think that is sort of the 

public/private model that you might be looking at. 

It is a cleaner form I think of some of these controversial WI-FI 

networks that are in the news in Philadelphia and some other cities.

Mr. FORTENBERRY. So this is very underdeveloped I think is 

what you are saying?

Mr. PETERS. It is very, very recent.

Mr. FORTENBERRY. Okay.

Mr. PETERS. It is just, I mean, really the next few months.

Mr. FORTENBERRY. All right. Thank you.

24

Chairman MANZULLO. Mrs. Moore?

Ms. MOORE. Thank you, Mr. Chairman. I was just sitting here 

feeling frustrated because I did not hear one single—I did not read 

one single talking point about the repeal of PUHCA during the 

bankruptcy bill discussion, and I am really wondering if in fact 

these kinds of arguments, if this PUHCA was repealed inadvertently from drafting instructions or was there a lot of dialogue in 

Congress about the impact of repealing PUHCA. That is one question I have. 

Another question that I have, and I am mindful of the time. 

What do small businesses or companies do now for emergencies, 

when someone has a gas explosion or electrical problem? I can see 

these larger companies contending that they need to maintain an 

operation in order to respond to the emergency. How does the small 

business community respond to those sort of contentions that they 

need to use whatever loopholes or have other holding companies so 

that they can respond to emergency situations? 

Thank you.

Mr. KELLEHER. I could answer that as a gas fitter. We definitely 

believe that the utility companies, since they are providing the gas 

to a building, they are well suited to go in in an emergency situation. Contractors have no problem with that. 

What we have a problem with is when someone goes out to read 

your gas meter and leaves a little ad behind that says call the gas 

company. We will come over and replace your boiler. That is what 

we have a problem with.

Ms. MOORE. And this repeal of PUHCA during the discussions of 

the bankruptcy bill, was there a lot of activity? Maybe the public 

member would have some knowledge of this.

Ms. HARGIS. Well, there has been a huge industry lobby trying 

to kill PUHCA since about 1935, actually 1934. It was the biggest 

legislative fight of FDR’s first term, and it looks like they finally 

succeeded at least partly. 

No. I mean, I wish the Financial Services Committees had looked 

at this because the bankruptcy situation—as somebody had pointed 

out, with the Southern Company they put all their deregulated 

businesses into Merit. Merit not only went bankrupt. It is now 

suing the Southern Company. 

Xcel. They had three PUHCA regulated utilities, affiliates. They 

are doing just fine. They put all of theirs—they spun them off into 

NRG. NRG went bankrupt, pulling down the credit rating of all the 

rest of them. It is a terrific problem. 

Even with Enron, you know, the SEC under PUHCA actually has 

jurisdiction over bankruptcy of public utilities so that ahead of the 

bankruptcy, the creditors, they can put the consumers. You know, 

with PUHCA gone that is gone as well, so it is a huge issue.

Chairman MANZULLO. Mr. Akin?

25

Mr. AKIN. Thank you, Mr. Chair. Just a quick question or two 

here for Mr. Harvey. 

First of all, does the Baltimore Gas & Electric use its employees 

to perform non-utility work in central Maryland? Second of all, has 

your company lost jobs due to unfair competition from Baltimore 

Gas & Electric’s unregulated utility?

Mr. HARVEY. They used to use utility employees. I do not know 

if they still are or not. I do not know if they are sharing back office 

personnel. We suspect they are, but that is kind of behind their 

closed doors. We do not have access to that. 

We lose work to Baltimore Gas & Electric every day without a 

doubt. They are a force to be reckoned with in our marketplace.

Mr. AKIN. I have heard of this issue as a legislator. Probably 

even before I came to the Congress it was out there. 

I guess my question was how common is it, and I assume probably there are areas or certain states where it may be more common compared to other places where we are not seeing that much. 

It is more sensitive. I am afraid they are going to do it rather than 

the fact that they are.

Mr. HARVEY. Right.

Mr. AKIN. Can anybody on the panel answer how much is this 

currently a problem and in what parts of the country?

Mr. MARTIN. It is occurring in West Virginia. We have had several instances where the utilities have gone out and bid on projects 

in fact where their price was artificially low because they are only 

paying that incremental cost and not the portion of the fixed cost 

everybody else has to share in.

Mr. AKIN. So you are saying it was common in West Virginia, 

and in Maryland there is some of it there. Anybody know about 

anywhere else?

Mr. KELLEHER. I think if you look around the country you are 

going to see it in a number of states. Michigan, for instance. The 

contractors in Michigan fought a very long battle to deal with this 

issue. 

It is not just the large utility companies that are involved. I 

think if you go to some of these states you will find that some of 

the smaller regional companies are doing exactly the same thing. 

It is a national problem.

Mr. AKIN. Okay. Thank you. I think that answered my question. 

Thank you, Mr. Chairman.

Chairman MANZULLO. Thank you. 

Mr. Davis?

Mr. DAVIS. Thank you very much, Mr. Chairman. 

26

Mr. Martin, you mentioned in your testimony one specific problem with utility competition. Are you aware of any other instances 

of any other contractor groups where there have been similar problems?

Mr. MARTIN. Yes. There have been several different instances. I 

recall at a local prison changing out some electrical transformers 

where the utility was the low bidder and got that job. There was 

another one at a hospital, the same type of thing. It was changing 

out transformers. 

One particular instance was a street lighting project in Charleston, West Virginia, and that one in fact was challenged in the 

court. Again, the utility was the low bidder. Their price was substantially lower than the next bidder. Again, it was challenged in 

the court, but the utility explained that they were not cross-subsidization because they were paying the full incremental or additional cost. 

What they do not say is the fixed cost that a small business has 

to incur to have an office complex or the equipment sitting there 

being non-productive. We have to spread that across the times that 

we are productive and do have a job. Therefore, their cost is much 

less.

Mr. DAVIS. Has the West Virginia Public Service Commission 

been of any help?

Mr. MARTIN. No, they have not. Their focus seems to be more on 

the direct subsidization and not these indirect or hidden subsidies 

that are out there. They are looking at are they paying for these 

additional costs and making sure that the regulated side is not incurring any additional cost for the non-regulated side.

Chairman MANZULLO. Mr. Davis, if I could interrupt to let Mr. 

Chabot have an opportunity to ask a couple questions?

Mr. DAVIS. Okay.

Chairman MANZULLO. Is that okay with you?

Mr. DAVIS. Yes.

Chairman MANZULLO. Mr. Chabot?

Mr. CHABOT. Thank you very much. I will be brief. 

Mr. Harvey, I might mention that the chairman of your association, Greg Lesgang, lives in my district. He came into my office and 

spoke with me—

Mr. HARVEY. Good.

Mr. CHABOT. —in Cincinnati this past week and had some suggested questions.

Mr. HARVEY. Good.

27

Mr. CHABOT. Most of those have already been asked by my colleagues, but I think this has been a very interesting hearing. 

Let me ask. You talked in your testimony about the utility companies sharing resources and consolidating overhead with these unregulated businesses. Are you aware of these utilities sharing customer information or marketing data with unregulated businesses?

Mr. HARVEY. Yes. Yes. We have seen instances where, for instance, the gas company will be running gas lines to a neighborhood, and then the BG&E Home salesman will essentially immediately start canvassing those homeowners for what we call conversion.

Mr. CHABOT. Okay. What has been the immediate economic impact on your company specifically or on others in your association 

relative to the cross-subsidization?

Mr. HARVEY. We have seen a big impact on our business. It has 

really stymied a lot of our potential growth, and when you talk to 

the vendors and you look at how much equipment is sold in our 

area and where it is going, through which contractors, BG&E has 

a big piece of the pie.

Mr. CHABOT. Okay. Thank you very much. 

I will yield back the balance of my time, Mr. Chairman. Thank 

you. I would like to commend the Chairman for getting around 

late. You handled this masterfully, I have to say.

Chairman MANZULLO. Well, we try to be fair. 

First, I want to thank you all for coming. I guess one of the lingering questions here is whether or not once there is a relationship 

between a utility company and an extended service as it were 

whether or not when a phone call comes in that somebody’s utilities are out does somebody get preferred? I guess that is one thing 

we will never know.

Mr. KELLEHER. No. That does happen. That is common in fact if 

a utility customer calls in and they have some kind of problem. In 

fact, as my colleague has mentioned, sometimes right on the phone 

tree there they will refer you over to their affiliated business. They 

will directly refer you over to their affiliated business. 

That is a job that is being subsidized by the ratepayers, and it 

is a job that is not going to private business.

Chairman MANZULLO. Mr. Harvey?

Mr. HARVEY. Just another tactic is that they will finance the new 

installation and put it right on your gas bill or right on your electric bill.

Chairman MANZULLO. We have to go vote. This is a fascinating 

hearing. It sounds like this might be the beginning of some further 

inquiry here. 

28

This is the Small Business Committee. We have absolutely no jurisdiction over what goes on in the bankruptcy and obviously under 

Energy and Commerce, but I guess it is the type of thing where 

it is a problem you are sort of living with now, but where are you 

going to be five years from now? 

Is everything going to be Mr. Big? Will the ability to, for example, buy health care through a huge utility at lower rates because 

of your large company, will that make them more competitive as 

it were with the small mom and pop shop that cannot afford that 

type of break? 

I do not have the answers to these, but I just want to let you 

know that we are open for more inquiry, and the record will be 

open for five days for people that want to submit statements. 

This hearing is adjourned. Thank you. 

[Whereupon, at 3:39 p.m. the Committee was adjourned.]

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